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Title: The lender of last resort and liquidity provision: How much of a departure is the sub-prime crisis?
Authors: Davis, EP
Keywords: Lender of last resort; bank liquidity; market liquidity
Issue Date: 2009
Publisher: Brunel University
Citation: Economics and Finance Discussion Paper, Brunel University, 09-09.
Abstract: The traditional role of the lender of last resort (LOLR) is to avoid unnecessary bank failures that could threaten systemic stability, while ensuring that there are suitable safeguards for central bank balance sheets and that moral hazard is minimised. The sub-prime crisis has shown that traditional models of bank liquidity risk and of LOLR require revision, as was already apparent to a lesser extent in the Russia/LTCM episode. Funding risk now interacts with market liquidity risk, to create difficult challenges for central banks. Even in the relatively non-systemic period up to September 2008, the LOLR had to adapt radically, for example, in terms of lending to investment banks, taking lower quality collateral and lending for longer maturities. Central banks have also been challenged by difficulties in maintaining confidentiality of support and by the interaction of these problems with low levels of deposit insurance. Since September 2008, although action has mostly been in line with traditional approaches for systemic crises, there have been some further adaptations in line with the systemic nature of the crisis, notably by the Federal Reserve acting as market maker or investor of last resort in illiquid securities markets.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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